With the signing of the Infrastructure Investment and Jobs Act in late 2021, things are looking up for federal construction projects in the months and even years ahead. If your company is considering getting in on the action, but perhaps unfamiliar with the road to get there, the journey will begin as most jobs do — with a bid.
The federal government typically procures construction work under one of two methods: sealed bidding or contracting by negotiation. Here’s a brief review of each.
Sealed bidding
By far the predominant method for most federal construction work, sealed bidding begins when the government releases an invitation for bid (IFB). The IFB provides the project specifications or statement of work, proposal instructions, and a draft contract. Bids are then opened publicly.
Sealed bidding is used when the specifications are clear, and the determining factor is price. The qualified construction company with the lowest price will win the bid, which will be a firm, fixed-price contract.
Generally, contractors who win sealed bids won’t have to submit cost and pricing data. The cost principles contained in the Cost Accounting Standards (CAS), a set of standards and rules that the federal government uses to determine costs during negotiated procurement, typically don’t apply. However, the Federal Acquisition Regulations (FAR) do apply to sealed bids and, indeed, to all government procurements.
Because CAS doesn’t apply, a substantial portion of the regulations governing government contracts relating to cost accounting won’t come into play for most construction businesses. Nonetheless, contractors bidding these types of contracts shouldn’t completely ignore the regulations because they may come into consideration if:
- Change orders are requested,
- The contractor submits claims for additional compensation, or
- The government terminates the contract for its convenience.
The applicability of cost principles to fixed-price contracts is specifically addressed in FAR 31.102, “Fixed Price Contracts.” It states, in part, “The applicable subparts of part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever (a) cost analysis is performed, or (b) a fixed-price contract clause requires the determination or negotiation of costs.”
Contracting by negotiation
Although sealed bidding is the most popular procurement method, the federal government is more frequently using contracting by negotiation for some construction projects. These include multi-year construction management contracts, facilities management work, and contracts to be performed overseas.
Essentially, contracting by negotiation is used when the services being procured are complex, difficult to clearly describe and factors other than price may affect the award. Unlike the sealed bidding method, which awards only fixed-price contracts, negotiated contracts can take many forms — including cost-reimbursement contracts.
The contracting by negotiation process begins when the federal government publishes a request for proposal (RFP). Like an IFB, an RFP contains the statement of work or specifications, proposal instructions, and a draft contract. In contrast to sealed bidding, however, the contract proposals aren’t opened publicly. Rather, the federal government evaluates the proposals against an established list of evaluation criteria addressing technical, management, past performance and cost items.
After the initial evaluation, the government selects the best proposals for inclusion in the competitive range. Then it negotiates with the offerors in the competitive range by seeking clarifications; pointing out weaknesses; suggesting improvements; and discussing terms and conditions, schedules, and other items. On completion of the negotiations, offerors submit a Final Proposal Revision.
The federal government awards the contract to the construction company that offers the best value, all factors considered. Significantly, this isn’t necessarily the lowest bidder.
Key differences
There are several factors present in negotiated contracts that aren’t found in a sealed bid, fixed-price contract. Negotiated contracts awarded for more than $700,000 require the contractor to submit cost and pricing data before the award is granted.
Also, with a negotiated contract, the award may be subject to an audit to determine the contractor’s compliance with cost principles and the accuracy of underlying cost data used in the construction company’s estimates.
In many cases, the construction business must certify that it has disclosed current, accurate, and complete cost and pricing data. It’s in these situations that contractors who are unfamiliar with the federal procurement process may find themselves unprepared to deal with the many applicable regulations.
Look before you leap
Federal construction projects have their pros and cons. On the plus side, the contract values can be substantial, and you don’t have to worry much about the project owner’s ability to pay. On the downside, you’ll need to follow many rules and the money earned may be slow to arrive. Be sure to look before you leap when bidding on one of these jobs.
We welcome the opportunity to put our accounting expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
